September 04, 2014

The Fishiness of Mayor Kevin's Tax Giveaway to Illumina Corporation

San Diego's Mayor Kevin Faulconer recently signed a deal with Illumina Corporation that was supposedly designed to keep the corporation from jumping ship and landing in another state or jurisdiction. The City of San Diego agreed to rebate $1.5 million in sales and use taxes. In return Illumina promised to keep a number of jobs in San Diego for the term of the agreement. With revenue of just over $1 billion last year, Illumina sells machines that sequence the human genome. The company leases 6 buildings in San Diego totaling over 560,000 sq. ft. and currently has 1500 employees.

Illumina likes to brag about itself as being the "Apple of the genomics industry." It wrote to its shareholders in 2012:

“Illumina is like the Apple of the genomics business. Tools made by the San Diego company are revered by genomics researchers around the world just like millions of consumers love their iPhones and iPads. And Illumina holds its dominant position at an enviable moment in history, as we’re heading into a scientific golden age when human genomes will be sequenced for $1,000 or less.” – Xconomy reporter Luke Timmerman, March 6, 2012

MIT has called it the "World’s Smartest Company" ahead of Tesla Motors, Google and Samsung.

But the deal the City has entered into with Illumina is fishy on several levels. For starters in 2007 GenomeWeb News reported that Illumina signed a fifteen year lease for a new 84,000-square-foot facility currently under construction in San Diego that will enable it to expand its laboratory and office workforce. BioMed Realty Trust, a real estate investment company focused on the life sciences industries, said the new facility will expand an existing 110,000-square-foot facility that Illumina leases at the University Towne Center. Furthermore, Illumina said it had added a 15-year extension to the lease on the existing property. The new facility will allow for the creation of as many as 1,200 new jobs in the San Diego area, according to BioMed.

A fifteen year lease on new and existing buildings signed in 2007? The lease will be up in 2022. It doesn't sound like Illumina has plans to abandon San Diego any time soon. Meanwhile, the Mayor signs a ten year deal that would keep Illumina here till 2024. So for $1.5 million the City gets two more years of Illumina's commitment to San Diego. But wait there's more. The ten year deal is not really a ten year deal. Sound fishy? Read on.

And then there's the shady reports about Illumina being lured away by Memphis, Tennesee or Poway. Poway?? Good God, does the City of San Diego really have to spend $1.5 million to prevent a company from moving to Poway? For those of you who don't know, Poway is located next door to San Diego in San Diego County. It's part of the San Diego Greater Metropolitan area, for Pete's sake. And those mysterious rumors of a move to Memphis. Problem is sources in Memphis don't know anything about it.

Media reports on the "historic" deal—as Council President Todd Gloria described it—suggested that the cities most aggressively seeking favor with Illumina's allure were Poway and Memphis.

This was news to some pretty smart folks in Poway and Memphis.

"That really surprises me, because we've never been in contact with the company," Poway Mayor Don Higginson told Spin. "I checked with our economic-development director, and he said we were never approached by them."

Mark Cafferty, president and CEO of the San Diego Regional Economic Development Corp.— a key organizational player in reaching the Illumina agreement — suggested that Memphis was the big player here in luring Illumina away. Au contraire, said Reid Dulberger, head of economic development for the Memphis area. He'd never heard of such a thing. Asked if the offer suggested by Mark Cafferty was in the ballpark, he replied, "There is no ballpark."

Similarly, representatives of the Memphis Chamber of Commerce and Mayor's office knew nothing about any courtship involving Illumina. It seems like this courtship of Illumina by outside jurisdictions was a fig newton of Mark Cafferty's imagination. After all a CEO of an Economic Development Corporation has to do something to earn his pay. Why not gin up a $1.5 million tax giveaway to some leading corporation which by the way Illumina doesn't really need. They are quite profitable thank you very much.

Local news NBC 7 San Diego reported that "the deal" was announced on July 15, 2014: "Under the 10-year agreement, Illumina will keep 300 middle-class manufacturing jobs in San Diego and receive a tax break up to $1.5 million." First of all the "10-year agreement" implies that those 300 middle class jobs will stay in San Diego for 10 years. Not true. Under terms of the agreement the deal could end much sooner if certain conditions are met. But remember that figure "300 middle class jobs." As we shall show, that is a blatant untruth and misrepresentation of the facts.

Illumina has 1500 employees in San Diego. So retaining 300 middle class jobs is a pittance at best compared to its total San Diego employment. And then remember those 1200 additional jobs that Illumina's expansion at University Towne Center, for which they signed a 15 year lease, allowed for the creation of? That's 2700 jobs in San Diego at present and in the near future, but the Mayor gave away $1.5 million of taxpayers' money to retain a paltry 11% of those jobs. And as we shall show, it's even less than 11%. Esau sold his birthright for a mess of pottage, but Faulconer sold out the taxpayers for a mess of BS.

And then there's the tax rebate deal itself. When scrutinized in the harsh light of day, it has aspects which haven't been made apparent in reports the media has made to the general public. First of all it's not a $1.5 million deal. It's a $1.5 million deal with interest. Witness this exchange on KPBS:

MAUREEN CAVANAUGH: That is up to $1.5 million, is that right?

ALMIS UDRYS: That is correct, $1.5 million with interest as well, over the time while they are claiming the rebate, interest would be accrued as well. In the end it would be over $1.5 million.

So the "tax break up to $1.5 million." Not true either. Illumina will get $1.5 million plus 3% interest, and the payout will be in one lump sum which maximizes the interest.

By the way Almis Udrys also noted that this is the third incentive deal that the city has signed off on this year: "Two of them were craft breweries, Ale Smith and Ballast Point, earlier in the year..."

And then there's the matter of how the $1.5 million is rebated to Illumina. It is rebated out of taxes that Illumina expects to pay in the future above and beyond what they are paying now plus 30%. Illumina is expected to grow, have more sales, pay more sales tax and have even more employees than it has now. So they would go on paying the amount of taxes they paid last year (the benchmark year) plus 30%. Any sales tax above that would be rebated once the $1.5 million is reached. A fine detail is that the 30% only applies to sales tax; use tax rebates would be 100% above those paid in the benchmark year.

So last year Illumina paid about $1.3 million in taxes. Since the rebate amount must sit in city coffers until it totals $1.5 million to be paid out in one lump sum, it will accrue interest until Illumina decides to ask the city for a check. When the full $1.5 million has been received by Illumina (plus interest) or 10 years has elapsed, the deal will be terminated. That means that, if Illumina's sales skyrocket, those 300 jobs it promised to keep in San Diego could evaporate in just a few years not the 10 years the media has reported. And since Illumina is heading into a "scientific golden age" for human genome sequencing, they do expect their sales to skyrocket.

Illumina is adding 1200 jobs almost doubling its workforce. Therefore, it is a reasonable guesstimate that it expects to double its sales. Doubling its sales doubles its sales tax. So next year or the year thereafter Illumina could be paying $2.6 million in taxes which would put it at or near the $1.5 million rebate level. The point is that in just a couple years Illumina could have satisfied conditions for the rebate, taken the $1.5 million and left town except for the fact of those 15 year leases. Oh well, they could leave at least by 2022 so that the 10 year deal to save 300 jobs would be moot.

The rationale is that keeping Illumina here keeps the sales and use taxes coming at least at the present rate plus the employees that it keeps here pay sales tax and other taxes themselves and generate up to three ancillary jobs. Of course, Illumina could move about 90% of its employees to another state immediately. The deal with the city doesn't constrain them from doing that.

Moreover, Alan Gin noted in the same KPBS interview that this sort of tax giveaway "will then impact the level of services that can be provided, spent on infrastructure, and other things." That's $1.5 million plus that won't be spent on parks, libraries, schools, repairing potholes, replacing watermains and improving neighborhoods. Remember K-Faulc's mantra: “There is no such thing as a Democratic or Republican pothole.” Whoops, I guess those Democratic potholes won't get fixed after all.

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

City Council's Approval a Mere Afterthought

So did Illumina shake down the city and threaten to move elsewhere if they didn't get their spif? Not at all. The tax giveaway was initiated by Kevin Faulconer's team itself with a little help from the folks at San Diego Regional Economic Development Corp. which gave the mayor's office the heads up. It seems that the city undertook to shake itself down.

On July 21 the City Council took up the Economic Development Incentive Agreement (EDIA) with Illumina, Inc., to provide a sales and use tax rebate. On the Council Docket was the following item description:

Authorize the Mayor to enter into an Economic Development Incentive Agreement with Illumina, Inc., to provide a sales and use tax rebate to encourage this company to retain its manufacturing operations and its taxable product sales operations with the City of San Diego.

From an email inquiry to the members of the City Council, I received this reply from Councilmember Lorie Zapf's office:

Yes, the City Council approved the Illumina deal. It came before Council twice; the first time was on July 21, 2014 and all members were present. The second time was also unanimous on August 7, with Councilmembers Kersey and Emerald absent.

However, according to the docket, it was noted that this item was pursuant to Section 99 of the City Charter (10 day published notice, approval by Ordinance and 6 votes required). There was no mention that the item was voted on at all on July 21. And remember the Mayor had already signed the agreement on July 15!

NOTE: If some of the subsequent links generate a "File or Directory Not Found" message, click here and then scroll down and click on

Illumina would be obligated to retain all of its manufacturing jobs within the City, at any site of its choice, during the term of the EDIA. The term of the EDIA would be the lesser of 10 years or the year that Illumina has generated new additional (above the benchmark) sales and use tax revenues of $1.5 million.

This is interesting for two reasons: (1) Illumina is not required to maintain jobs in the City for ten years as reported in the media but for "the lesser of 10 years or the year that Illumina has generated new additional ... sales and use tax revenues of $1.5 million" and (2) Illumina would not be required to maintain 300 jobs in the City but "all of its manufacturing jobs within the City."

Under the item Community Participation and Public Outreach Efforts it was noted: "None - Confidential municipality-taxpayer negotiations" So the inner workings of the City in this regard are meant to be shrouded in secrecy.

Jay Flatley, CEO of Illumina, signed the Economic Development Incentive Agreement with the City on July 7 long before the City Council "approved" it. The agreement specified the following:

Job Creation and Retention. During the Term of this Agreement, Company shall (i) create or retain all manufacturing jobs existing in the City of San Diego as of the Execution Date; and (ii) make commercially reasonable efforts to create Sales Force jobs, or retain at least the same number of Sales Force Jobs, located in the City of San Diego as of the Execution Date.

The exact number of those manufacturing jobs is not mentioned nor is it specified what a "commercially reasonable effort" is. This would probably not hold water in a court of law.

On July 10, the following document was ready for Mayor Kevin's signature: "AN ORDINANCE OF THE COUNCIL OF THE CITY OF SAN DIEGO AUTHORIZING THE ECONOMIC DEVELOPMENT AGREEMENT WITH ILLUMINA, INC. AND APPROVING CERTAIN RELATED ACTIONS." approved by City Attorney Jan Goldsmith. This document contains a lot of legalese in the form of Whereas this and Whereas that followed by Therefore, Be It Ordained blah, blah, blah. However, one of the Whereases is particularly, well, illuminating:

"WHEREAS, Illumina is committing to create or retain over 100 middle-wage manufacturing job opportunities within San Diego, jobs which are likely to be filled by San Diego residents"

Wait a minute, the legal agreement specifies only 100 manufacturing jobs as opposed to the 300 manufacturing jobs widely reported by the media?! You mean to tell me that this $1.5 million rebate was created to retain 100 jobs in San Diego for what might turn out to be far less than the ten years reported in the media? And that's 100 jobs out of approximately 2700 jobs that Illumina expects shortly to have? Or approximately 1% of its jobs?

The City and its taxpayers have been hoodwinked.

On July 8 David Graham, Deputy Chief Operating Officer, Neighborhood Services, sent a Memorandum to City Council President Todd Gloria with a Direct Docketing Request which consisted of urging the City Council to go ahead and approve the Economic Development Incentive Agreement that Jay Flatley had already signed. It noted: "A proposal for an EDIA would normally be considered by the Council Committee on Economic Development and Intergovernmental Relations (ED&IR) prior to consideration by the full City Council." But Graham wanted it ramrodded through the City Council without further consideration because after all the details had already been worked out and it had already been signed by Flatley. It was awaiting Faulconer's signature as soon as the City Council complied.

The City Council did not give final approval to the Illumina deal until August 7 no doubt because of that Section 99 of the City Charter that required a 10 day waiting period. In any event the deal had already been done, and the City Council's "approval" was after the fact. Faulconer's deal with Illumina was a fait accompli.

Jumping the gun on the City Council's approval, on July 15 Mayor Kevin Faulconer put out a press release:

Agreement with Illumina Inc. will keep hundreds of high wage jobs in the city

San Diego, CA – Today Mayor Kevin L. Faulconer joined Illumina Inc. CEO Jay Flatley to announce an agreement that will keep the medical device company and its good-paying jobs in San Diego. Illumina was recently named "World’s Smartest Company" by the MIT Technology Review, ahead of Tesla Motors, Google and Samsung.

The City will provide a tax rebate in exchange for Illumina retaining approximately 300 middle-class manufacturing jobs in San Diego.

So did the City Council merely ratify a deal on August 7 that had already been consummated on July 15? And the retention of 300 middle-class manufacturing jobs? What about the 1500 other higher paying R&D and sales jobs that Illumina now provides and the 1200 new jobs it will add according to Biomed? Illumina has in no way committed itself to maintaining those jobs in San Diego. And as it turns out, the 300 manufacturing jobs had magically diminished to 100 manufacturing jobs when the ink was put to paper.

Nothing about this deal is what it seems. The $1.5 million rebate. It's actually $1.5 million plus 3% which the city will pay out in one lump sum. That 3% really adds up year after year. The 10 year time period? It's really the lesser of 10 years or whenever Illumina can claim the rebate. Illumina moving to Poway or Memphis? It turns out neither Poway nor Memphis had ever heard of that. Illumina seeking a tax advantage not to move out of San Diego? Illumina CEO Flatley didn't approach the City. The Mayor's office in the person of Almis Udrys, Kevin Faulconer's Director of Government Affairs, approached him. The City Council's approval of the deal? The City Council's "approval" came after the deal had already been signed by Faulconer and Flatley. Did anyone on the City Council do their homework or due diligence to check this deal out? The first clue, Sherlock, was that Illumina had signed 15 year leases on all or some of its properties. Doesn't seem that they were going anywhere any time soon.

The Illumina deal sets a disastrous precedent for other corporations to seek out their own tax deals. It is just the harbinger of things to come. With the San Diego Regional Economic Development Corporation giving the "heads up", and Almis Udrys as liason, Mayor Faulconer is only too able and willing to do tax giveaways to San Diego corporations. Hey, we're open for business. C'mon down! The City Council's approval will just be an afterthought. Someone from the Mayor's office, like David Graham, will send the Council a Memorandum telling them to hurry up and ratify the Mayor's deals.

That's money that won't be used for parks, libraries, schools and infrastructure repairs like replacing 100 year old water mains and filling potholes. The Republicans' goal is to defund government and give the money to corporations. As their spokeman, Grover Norquist, has said, "We want to make government so small that it can be drowned in the bathtub." That's the Republican mantra. Corporate welfare of the type given to Illumina Corporation is a handy means for defunding government and transferring the money to the private sector.

Peter D. Enrich, a professor at Northeastern University School of Law has written:

The proliferation of state and local tax incentives designed to attract or retain business investment ... has proven troublingly resistant to reform. Despite a growing recognition ... that the competition over business incentives is at best a zero-sum game... the size of the incentive packages offered for large corporate facilities reaches ever-new heights ... The only consistent winners are the large businesses that can pit one jurisdiction against another for reduced tax burdens, while other taxpayers and citizens pay the cost in constrained government services and higher taxes ... The states and localities face a classic collective action problem: when they each pursue their individual self-interest, they all end up worse off.

CEO Jay Flatley was not going to move Illumina Corporation out of San Diego. He needs to stay close to the world class research universities in San Diego and the relationships developed therewith. His executives and highly paid employees don't want to trade San Diego's climate, the best in the nation, for Rich Perry's Texas hell hole. His kids want to continue surfing at the beaches. They all love their houses in La Jolla and Rancho Santa Fe. The wives want to continue shopping at University Towne Center. To uproot all these executives and highly paid employees would be unthinkable. Why then, does Mayor Faulconer think he has to offer tax rebate incentives to get major corporations to stay here? And to bum rush the City Council who obviously had not done their homework and due diligence on this issue. The best policy is to have faith and believe in San Diego as a place that major corporations would want to locate and, once located, would want to stay. The urge to offer tax incentives to corporations must be resisted. A Democratic Mayor would have resisted.

The Illumina rebate is just the beginning, the advent of a new era in San Diego politics, the signal that more is yet to come. The Mayor is sending a message to business. C'mon y'all, line up for your free tax giveaways. Mayor Kevin is open for business!